How to get a HELOC with bad credit

Written by: Erica Gellerman, CPA
• Updated •8 min read
Woman standing in a coffee shop, smilingImage: Woman standing in a coffee shop, smiling

In a Nutshell

Bad credit can make it difficult to get a home equity line of credit, even if you have plenty of equity in your home. And even if you’re able to get approved for a home equity line of credit with bad credit, it will likely cost you more. If you need money and have bad credit, it may be worth considering alternatives to a HELOC.
Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

Borrowing against your home equity — the difference between how much you owe on your home and how much you could sell it for — may seem like a fast, easy way to get money when you need it. But what if you have bad credit as well as home equity?

Is it possible to get a home equity line of credit when you have bad credit? Maybe — but it could be difficult. And if you do get approved, you could face higher costs for your HELOC than you would if you had good credit.

Read on to learn more about whether you may be able to qualify for a HELOC with bad credit — and what you should know before applying for a line of credit.

What is a HELOC?

A home equity line of credit is a revolving line of credit that works in much the same way that a credit card does. Your HELOC will typically have a credit limit and a “draw period” — a set amount of months during which you can use the line of credit. You can borrow against available funds whenever you need money, repay it with interest and borrow again as long as you don’t exceed your credit limit.

But while certain credit cards and personal loans are unsecured credit, a HELOC is secured by the equity in your home. That means defaulting on a HELOC could put you at risk of losing your home.

Generally, banks limit the amount of home equity you can borrow to no more than 85% of a home’s appraised value, less whatever you owe on a first mortgage.

Why would I want a HELOC?

Borrowing for big expenses like consolidating debt, home repairs and improvements or to pay medical bills can be difficult. If you have equity in your home, a HELOC can seem like an easy way to get the big money you need.

Because your home is used as collateral for the loan — meaning there is less risk for the lender because they can take your home in the event you default — the interest you pay may be lower than the interest you’d pay on other types of loans. But since the line of credit is secured by such a valuable asset, you might want to think twice about using it to pay for day-to-day expenses. Securing the line of credit with your home means the risk is on you and that may lose your home if you do not make required payments on time.

Learn more about which type of home improvement loan could be best for you.

How does a lender determine how much you can borrow?

Each lender has its own criteria for determining your eligibility and the loan amount you may qualify for, but they’ll typically review certain financial factors.

Credit history

When you apply for a HELOC, the lender will review your credit history to help determine your ability to repay the loan.

Available equity

Because you’re using the equity in your home as collateral to borrow money, your available equity will help determine how much you can borrow. The exact amount you may be able to borrow depends on the lender but a typical amount is 85% of the value of your home, after subtracting the amount you owe on your mortgage.

Debt-to-income ratio

Lenders generally want to ensure borrowers can repay their home loans. One financial factor lenders typically consider is debt-to-income-ratio — the total of all the debt you pay in a month divided by your gross monthly income. For example, if you have a $1,200 monthly mortgage payment and a $300 auto loan payment, you have monthly debt payments of $1,500. With a gross monthly income of $4,500, your DTI is 33%.

Each lender will have a different DTI that they use, but you’ll likely find many lenders using 43% as the highest DTI ratio they’ll allow for a qualified mortgage. According to the Consumer Financial Protection Bureau, studies have shown that borrowers with higher debt-to-income ratios are more likely to have trouble paying their mortgages every month.

Can I get a HELOC with bad credit?

It depends. Good credit can generally make it easier to qualify for loans and get favorable loan terms, including home equity financing. But depending on the lender and other considerations, it might be possible to get approved for a HELOC even with bad credit.

Lenders may consider other factors other than your credit scores when determining whether to approve you for a loan, so there may be a chance a lender would approve you for a HELOC even if you have bad credit.

For example, as of November 2020, here’s how Wells Fargo says your FICO® scores can affect your chances of being approved for a HELOC.

  • 760 and above: Depending a number of factors, these applicants may be able to qualify for the best rates they offer.
  • 700 to 759: Depending a number of factors, applicants will likely be able to qualify for credit, but likely not at the best rates they offer.
  • 621 to 699: Applicants may find it difficult to qualify for credit and are more likely to pay higher rates for it.
  • 620 and below: Applicants are more likely to have trouble qualifying for credit.

Each lender sets its own standards for minimum credit scores required to qualify for a HELOC.

How to apply for a HELOC with bad credit

Before applying for a HELOC, you’ll want to check on your credit scores, debt-to-income ratio and the equity you have in your house. Review your credit reports for any inaccuracies because incorrect info can negatively impact your scores. Generally, you’ll need a credit score of 620 or higher to qualify for a HELOC. 

Calculating your debt-to-income ratio may also be helpful to do before applying since lenders typically won’t approve applicants with a DTI of more than 43%. If your DTI is more than 43%, you may want to pay down some of your debt before applying. 

Determining how much equity you have in your home is also an important step to applying for a HELOC. Generally, you’ll need 15% to 20% equity in your home, though some lenders may have different requirements. 

You can also consider adding a co-signer to your HELOC. If your co-signer has strong credit, you may have a better chance of being approved for a HELOC with bad credit. 
The next step is to start looking at lenders to see who can give you the best rates and terms.

Things to know about HELOCs with bad credit

If you are approved for a HELOC with less-than-stellar credit, you should keep several things in mind.

Higher interest rates

Generally, if you have lower credit scores, your lender is more likely to charge you a higher interest rate because you may be considered a riskier borrower. This can make borrowing money significantly more expensive.

Changing terms

Depending on the terms of your agreement, the lender may be able to freeze or reduce your credit line if your financial situation significantly changes. For example, if the value of your home decreases after you qualify for a HELOC, your lender can decrease or freeze your line of credit. If that happens, you may find yourself unable to borrow as much money as you had planned.

Risking your home as collateral

If you’re not able to keep up with your HELOC payments, you could be putting your home in jeopardy. Because the HELOC uses your home as collateral, the lender could foreclose on your home if you’re not able to make payments.

Alternatives to HELOCs

Before you apply for a HELOC with bad credit, you might consider exploring other options.

Home equity loan

Home equity loans are very similar to HELOCs, as they use the equity in your home to secure the loan. As opposed to a HELOC, the money from a home equity loan comes in a lump sum. This could be a better alternative if you know exactly how much money you’ll need and you want it all at once.

Unsecured personal loans

You can apply for an unsecured personal loan, so you’re not using the equity in your home as collateral. Because an unsecured loan is considered from the lender’s perspective riskier — the lender doesn’t have the option of foreclosing on your home if you don’t pay it — you’ll usually have to pay a higher interest rate.

Cash-out refinance

With a cash-out refinance, you’ll take out a new mortgage for more than you owe on your existing one. Then, you’ll get to keep the difference in cash to use as you see fit. Keep in mind that you could end up with a higher interest rate and a higher payment than your current mortgage. You can also lose your home if you can’t afford to pay back your loan. Plus, you’ll need to pay closing costs again because you’re refinancing your mortgage — which may not make sense if you don’t need a large amount of cash.

Balance transfer credit cards

If you are considering a HELOC as a way to consolidate other types of debt, you might want to also look at a balance transfer credit card. This is typically done by someone who wants to move balances carried on a higher interest credit card to one with lower interest. Some credit card issuers offer balance transfer cards with an introductory 0% APR for a set promotional period. You’ll still need to repay the debt, but debt consolidation with a lower interest rate can help you pay it off sooner.

Contact your creditors

If you’re struggling with due dates on your upcoming bills and you don’t have the money to pay them, you might want to try talking with your creditors. Explain the situation and why you’re having difficulty making your payments. They may be able to work out a modified payment plan that can make your monthly payments more manageable.

FAQs about HELOCs with bad credit

Is it better to get a home equity loan or a HELOC if you have bad credit?

It depends on your personal situation whether a home equity loan or a HELOC may be better for you. One key difference is that a home equity loan gives you the money in a lump sum — but with a HELOC, you can take out money over a set period of time.

What is the lowest credit score to get a home equity line of credit?

Getting approved for a HELOC may not depend on just your credit score, but a lower credit score can make it more difficult to get approved. Your whole financial history — including factors like your debt-to-income ratio — can affect on your approval odds. Plus, each lender has different requirements so be sure to shop around to find a lender who may work for you.

Can I get a HELOC with a 500 credit score?

Generally, lenders look for a credit score of 620 or higher, but you may find lenders that are willing to approve you with a lower credit score. Keep in mind that a lower credit score may mean higher interest rates for your loan.

Bottom line

Having rough credit will likely make getting approved for a HELOC more difficult and more expensive. While you still may be able to get approved for a HELOC with bad credit, it might not be the best financial option for you. You’ll likely pay more in interest and you’ll be putting your home in jeopardy if you can’t keep up with the payments.

When considering a HELOC, be sure to take the time to explore other options that may be a better fit for your financial situation.

About the author: Erica Gellerman is a personal finance writer with an MBA in marketing and strategy from Duke University. She’s also the founder of The Worth Project: a weekly money newsletter you actually want to read. Her work has b… Read more.